May 14, 2018

GE14 Results: Sweeping Changes

Pakatan Harapan creates history with its surprising sweep of parliamentary and state seats in the most hotly contested elections in Malaysia. While widely expected, post- GE market jitters should create good buying opportunities as the sell-down may not be too deep should the new government quickly assert business-friendly policies. However, 2018’s outlook remains challenging amid expectations of a global liquidity contraction.

DEFENSIVE STOCKSWHAT’S NEW PH paves way for new dawn. Pakatan Harapan (PH) led by the 93-year old former prime minister, Tun Dr Mahathir Mohamad, fulfilled the ‘Rahman’ prophecy by dislodging Barisan Nasional (BN) to win 121 (54.5%) of parliamentary seats inclusive of ally party Warisan’s 8 seats (GE13: 89 seats), and an additional 5 states (in all controlling 7 states).  In state results, PR successfully defended Penang and Selangor, and won Kedah, Malacca, Perak, Negeri Sembilan and Johor from BN. A surprise, PAS retains control over Kelantan and wrested control of Terengganu from BN.  Sweeping control over hot seats, reflecting majority of voters’ sentiment. Of the 60 perceived hot seats, PH wrested 19 seats from BN while losing only 5, according to available (but incomplete) information. Many prominent BN leaders lost, including component parties MCA’s and MIC’s presidents, and several ministers.

NOTABLE STOCKS TO ACCUMMULATE ON WEAKNESS

ACTION Market sell-off to create opportunities. We are reviewing our end-18 FBMKLCI target of 1,830 for a modest downgrade. While PH brings hope for better transparency, accountability and financial prudence, investors would be sidelined by the current transitory state. Foreign inflows (+RM2.7b ytd) could reverse, potentially causing the ringgit to weaken. Nevertheless, this is not a ‘-1SD’ sell-off. Hopefully, the widely market sell-off may not be as deep as feared should PH quickly obtain the royal pronouncement as the rightful government, while declaring a two-day cooling-off holiday can provide some leeway for PH to ensure the investment community that it would pursue a business-friendly policy. PH has just publicly declared that it would not avenge and its main motivation is to ensure the rule of law.  Knee-jerk impact. The most impacted stocks could include perceived politically-linked companies (DRB-Hicom, George Kent, MyEG) and selected mega projects’ beneficiaries on concerns that PH may want to review pricing or defer some mega projects. In his final campaign address, Dr Mahathir voiced his displeasure over DRB’s stake sale in Proton. There could also be a knee-jerk impact on AirAsia, given Tony Fernandez’s open support for BN.  Buy high-yielding defensive stocks with relatively low foreign portfolio ownership and apolitical growth stocks. The former category of stocks should gain prominence, including sold-down BAT, DiGi, Magnum and YTL Power. FMCG stocks (including brewery stocks) also appeal, with the exception of the well-overvalued Nestle. We would accumulate selected export-oriented stocks, particularly E&E stocks Inari, Globetronics and VS Industry. On paper, gaming companies should benefit, given PR’s intention to repeal GST, although pragmatically, these companies may be subject to other forms of new taxes. We would also accumulate on weakness MRCB, which is considered apolitical (as it MRCB’s good welfare benefits EPF contributors).